June/July 2014

Quebec’s key asset

Ressources Québec’s $1 billion fund helping local projects advance

By
Antoine Dion-Ortega

In April, Montreal-based Stornoway Diamonds put together $944 million in financing, clearing the way to build its Renard diamond mine. As part of the deal,
the company secured $220 million from a relatively new subsidiary of the Quebec government, Ressources Québec, and another $105 million from the Caisse de
dépôt et de placement du Québec, for a total of $325 million in government funding – a little more than one third of the total construction cost. “The
successful completion of these transactions will remove the last remaining financing risk for the project and allow principal project construction to
commence,” said Stornoway CEO Matt Manson, when the financing was announced.

Ressources Québec (RQ) was born just two years earlier, as a subsidiary of Investissement Québec (IQ). Jean Charest’s Liberal government set aside $1.2
billion to invest in oil and gas and mining projects through the new body. To try to maximize Quebec’s benefits from the extractive sector, RQ would gather
up the government’s $236 million in existing holdings and invest $1 billion more in future projects. Despite two provincial elections and a fair amount of
political debate over mining regulations, RQ has become a key player in the financing of new projects in Quebec.

“RQ was the cornerstone of our fundraising,” said Benoit Gascon, president and CEO of Mason Graphite, which completed two funding agreements for a total of
$15.6 million on April 28 to advance its Lac Guéret graphite project. “They said: ‘We’re here. Go get the rest, but we’re here.’” RQ’s $3-million
investment in the project convinced other brokers of its solidity, he explained. “RQ was clearly the big boost that enabled us to close the campaign on
time, and with much more money than we had expected.” Mason Graphite plans to complete its feasibility study in early 2015. Currently, its project has
estimated Measured and Indicated Resources of more than 50 million tonnes with an average graphite grade of 15.6 per cent.

When RQ was created, the government’s idea was to cover the entire mining cycle, not only the exploration phase, which fell under Soquem’s domain as a
government organization that helps fund local exploration companies and research. “RQ was the subsidiary that would take on the whole development of mining
projects, from exploration to production – something that Soquem did not do,” said Luc Séguin, RQ’s vice-president for business development. “We currently
have 10 to 12 partnerships in our portfolio, but we have an equal amount in our pipeline.”

RQ selects the projects it will support based on five main criteria. First, the project must make an “easily measurable” contribution to the province’s
economic development. “We don’t make investments only to get a return,” explained Séguin. That said, the project must also be profitable. “If there is
enough probability that the project will see light, we jump on board.”

Projects must have an experienced management team. “We are patient investors; we don’t interfere in the company’s operations. We thus need to trust the
managers because they will make the difference after a while,” said Séguin. The organization also seeks to take positions on emerging markets, rather than
declining ones. “We target the new minerals: rare earths, lithium, nickel in the stainless steel production chain, vanadium,” he said. “We look at how
these markets evolve to decide whether we step in.”

Finally, the project must have social licence. Here, the lessons of the Mine Arnaud apatite project, a joint venture between Yara International and IQ,
loom large. The project, in the Sept-Îles region, has been the target of protests recently. “We never anticipated that there would be so much opposition to
the project,” Séguin said. “We underestimated the public’s intervention.”

RQ’s most common support consists of taking minority equity participation in companies, often with a debt portion conditional to the completion of the
financing package. RQ will often seek to negotiate a royalty or a streaming deal.

Its portfolio is currently worth about $300 million, with the Renard project clearly acting as its flagship. “Stornoway’s project is the most likely to see
light in the short term, since we are about to complete the fundraising, which means that construction could start this summer,” said Séguin. On May 23,
Stornoway announced it had raised more than $132 million in a public offering of subscription receipts, which was a precondition of the RQ investment.

In a time where markets are depressed, having RQ on board is priceless for junior mining companies. “For a lot of companies, one of the most difficult
stages is the scoping study through your feasibility study,” said Mark Selby, interim CEO of Royal Nickel Corp (RNC). “A lot of investors want to be there
for the exploration potential, but when you get the scoping study is when the heavy lifting starts.”

RQ invested $12 million in RNC’s Dumont project in August 2012, in exchange for a 0.8 per cent royalty on the net smelter return – an agreement that Selby
qualified as an “invaluable help.”

“When government agencies are investing alongside, it sends a strong signal of support to potential partners that the province wants the project to go
forward,” he said. “It makes it a much easier sale in Asia or Europe.” RNC completed its feasibility study in June 2013. Selby said he is hoping to find a
minority partner for a 30 to 45 per cent interest in the Dumont project by the fall, which would allow it to start construction early next year. “It is a
$1.2-billion capital expense, so we are talking to RQ to see if they are interested in advancing the project through production.

“Only maybe in Finland would you see anywhere close to this level of support from government to the mining industry,” said Selby.

According to Gascon of Mason Graphite, Quebec has a development-oriented mentality which is not opposed to government interventions when it is time to
finance mining projects: “It is not just subsidies, it is about holding interests in companies to attract foreign investors and support the local ones. The
rest of Canada doesn’t have that.”

Next: Under pressureMetallurgical coal operators navigating tough times in B.C.